Following the announcement of Japan’s 2023 tax reform outline (the Outline)1 on 16 December 2022, the draft legislation (the Legislation)2 for the 2023 tax reform was submitted to the Japanese Diet3 on 3 February 2023. As the Outline noted, the Legislation contains the laws to implement the income inclusion rule (IIR) to align with OECD BEPS 2.0 Pillar Two initiative. The law generally reflects the model rules (the Model Rules)4 established by the OECD. The law will be incorporated into the existing Japanese Corporate Income Tax Law.
The Legislation as it relates to the IIR provides:5
The application of the IIR is principally the same as the Model Rules such that a Constituent Entity, that is the Ultimate Parent Entity of an MNE Group, located in Japan that owns (directly or indirectly) an Ownership Interest in a Low-Taxed Constituent Entity at any time during the Fiscal Year shall pay a tax in an amount equal to its Allocable Share of the Top-Up Tax of that Low-Taxed Constituent Entity for the Fiscal Year.
Computation of the Global Anti-Base Erosion (GloBE) Income or Loss, Adjusted Covered Taxes, Effective Tax Rate and Top-up Tax are also intended to be in line with the Model Rules.
The IIR will apply to fiscal years beginning on or after 1 April 2024.
The Legislation is expected to be passed by the Diet in March 2023, and to be legally effective as of 1 April 2023. Items expected to be discussed by the OECD in detail this year, such as the undertaxed profits rule (UTPR) and the qualified domestic minimum top-up tax (QDMTT), are being considered for legislation in the 2024 tax reform at the earliest.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., Tokyo
- Koichi Sekiya
Ernst & Young LLP (United States), Japanese Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
- Pongpat Kitsanayothin
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
See EY Japan Tax Alert, 2023 Japan tax reform outline, dated 23 December 2022.
https://www.mof.go.jp/about_mof/bills/211diet/st050203h.pdf (in Japanese only).
Japanese bicameral legislature.
Capitalized terms that are not otherwise defined herein have the same or similar meanings provided in the Model Rules.